Practice Problems
Self-test
True-false
Indicate whether each of the following statements is true or false.
1. An objective of financial statement analysis is to provide information about the company's past performance and current financial position.
2. Vertical analysis helps detect changes in a company's performance over several periods and highlights trends.
3. Common-size statements provide information about changes in dollar amounts relative to the previous periods.
4. Liquidity ratios show a company's capacity to pay maturing current liabilities.
5. A company that is quite profitable may find it difficult to pay its accounts payable.
6. Financial statement analysts must be sure that comparable data are used among companies to make the comparisons valid.
Multiple-choice
Select the best answer for each of the following questions.
The following data were abstracted from the 2007 December 31, balance sheet of Andrews Company (use for the first two questions questions):
|
Cash |
$136,000 |
|
Marketable securities |
64,000 |
|
Accounts and notes receivable, net |
184,000 |
|
Merchandise inventory |
244,000 |
|
Prepaid expenses |
12,000 |
|
Accounts and notes payable, short-term |
256,000 |
|
Accrued liabilities |
64,000 |
|
Bonds payable, long-term |
400,000 |
1. The current ratio is:
a. 1:2.
b. 2:1.
c. 1.2:1.
d. 3:1.
2. The acid-test ratio is:
a. 1:2.
b. 2:1.
c. 1.2:1.
d. 3:1.
Benson Company shows the following data on its 2011 financial statements (use for the rest of the questions ):
|
Accounts receivable, January 1 |
$720,000 |
|
Accounts receivable, December 31 |
960,000 |
|
Merchandise inventory, January 1 |
900,000 |
|
Merchandise inventory, December 31 |
1,020,000 |
|
Gross sales |
4,800,000 |
|
Sales returns and allowances |
180,000 |
|
Net sales |
4,620,000 |
|
Cost of goods sold |
3,360,000 |
|
Income before interest and taxes |
720,000 |
|
Interest on bonds |
192,000 |
|
Net income |
384,000 |
3. The accounts receivable turnover is:
a. 5.5 times per year.
b. 5.714 times per year.
c. 5 times per year.
d. 6.667 times per year.
4. The inventory turnover is:
a. 5 times per year.
b. 4.8125 times per year.
c. 3.5 times per year.
d. 4 times per year.
5. The times interest earned ratio is:
a. 4.75 times per year.
b. 3.75 times per year.
c. 2 times per year.
d. 3 times per year.
Check your answers on the next page.